Three-A Resources - Turnaround on a solid footing

kiasutrader

Publish date: Tue, 28 Feb 2012, 10:21 AM

We maintain our BUYrecommendation on Three-A Resources (3A), with a slightly lower fair value of RM1.70/share vs.RM1.83/share previously, as we roll forward our valuation base to FY13F. Ourfair value is based on a fair PE of 21x FY13F revised earnings, close to thestock's historical mean of 20x.

3A posted a lower net profit of RM16mil for FY11, coming inbelow our full-year forecast and consensus by 10% ' the variance stemming froma lower-than-expected top line growth. Notwithstanding this, 3A's long-termgrowth remains intact ' underpinned by its JV with Wilmar International (WIL SpEquity) in China.

FY11's net profit fell 6% despite a higher turnover which wasup 8% YoY. Though the sales volume increased on the back of higher consumerdemand for the group's core products, these were more than offset by pricierraw material costs which resulted in a 2.9ppt-EBITDA margin compression.

On a sequential basis, 4Q net profit jumped 66% to RM5mil.We observed the continued EBIT margin expansion over the past three quarterssince the bottoming back in 1QFY11. The improved performance in 4Q was largelyattributable to a 1.4ppt-QoQ margin expansion to 9% arising from lower rawmaterial costs, namely that of tapioca starch.

Tapioca starch has softened since mid-2011, with the currentprice now 23% lower from the peaks back in June 2011. As such, we would expectthe impact from volatile raw material costs to be less subdued going forward.

The group booked lower losses of RM0.1mil for itsmultistorey US$7mil JV manufacturing plant in China (3QFY11: - RM0.2mil) due tooperational start-up costs and early stage investments. Higher utilisationrates and better economies of scale should underpin gradual improvements in thefollowing quarters.

All in, we have trimmed our FY12F-13F earnings forecasts by8%-22% after taking into account revised utilisation rates and marginassumptions. We now expect a net profit of RM27mil for FY12F, with earningsbuoyed by top line growth and further margin expansion. We continue to like thegroup for its transformational earnings growth as driven by geographic andproduct line expansion, a strong franchise in maltodextrin and a 'hands-on'management.

Source: AmeSecurities

3A (0012)

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